The Biggest Mistake Investors Make | EREI 7

The investor’s motto is “You make money when you BUY real estate!” But exactly HOW you purchase it is directly connected to how much success you experience as an investor. Sadly, the most critical error that real estate investors make is bad property analysis. Bad analysis results in bad buys, and bad buys mean that you lose money. On today’s show, discover how to determine whether or not you actually have a deal in mere seconds, and learn how you can almost completely remove the risk from your investing efforts.

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Podcast Transcript

(Voice Over): Epic Real Estate Investing Podcast Episode 7. You’re about to meet a man that can show you how he took control of his life and financial future and how you can do the same. He’s never been on TV. He’s not a millionaire. He doesn’t know Donald Trump. He is a full time real estate investor, newly discovered author, and family man. He does not report to a boss.

He creates his own schedule and takes his family on a few vacations every year. He got started investing in real estate with almost no money and a really crummy credit score. And he’s going to show you exactly how he did it and how he continues to do it. You will have to work.

You will have to be responsible. However, laying the beach, sipping fruity drinks is a reasonable goal. Without further delay, your guru. Sorry. Your guide to a better life, the real estate investor, Matt Theriault.

Matt Theriault: Hello. And greetings from The Epic Real Estate Investing Podcast. The podcast that will show you how to create wealth through conventional and creative real estate investing so you’ll have the option to realistically retire in the next 10 years or less. And enjoy the good life while you’re still young enough to do so.

My name is Matt Theriault, author, full time real estate investor and family man. If this is your first time listening to the show. You want to do two things. One, go back and listen to episode one. Episode one is going to give you the gist of what the show is about and why it’s here.

I mean everything that we discussed is going to make a lot more sense if you do that. And two, download the free real estate investing course on how to deals, no money required. And you can get at freerealestateinvesitngcourse.com.

It’s a step-by-step course of which I reveal everything that I do, everything that I say, everything that I use including the documents and contracts. Everything that you are going to need to invest in real estate using no money or credit. And that’s yours for free at freerealestateinvestingcourse.com.

All right. On e of the biggest mistakes investors make, in fact I think it’s the biggest is they improperly evaluate property particularly a property’s value with respect to the extra strategy the investor intends to execute meaning a property’s value can vary greatly based on how you expect to actualize your pay out. We will get in to exactly what I mean by that before the end of today’s show. But I have a feeling many of you will never look at a property’s value in quite the same way again.

So let’s get right into it. The Epic approach as we’ve covered up to this point breaks down the entire process of a deal like this. E stands for evaluate and decide. P is for present and get consent. I’s for investigate and negotiate. And C coming with the cash and close. And as promised from last episode, we’re going to take it from the top and discuss the E of the Epic approach. And discuss it in great detail on how to evaluate and decide and how to tell whether you have a good deal or not. And do it in a matter of minutes. I mean it’s in the evaluation where fortunes are made. That’s also where they are lost. Now the intent of this step is to run a brief evaluation of the property in question.

And come up with your own initial opinion of value. Now I repeat, your own initial opinion of value. I stress your own initial opinion of value because you can really lose your shirt investing based off of someone else’s opinion of value of which so many people do.

For example, you may hear someone say they purchased a property 60 cents on the dollars. Now what that translates to is 60% of fair market value or a 40% discount. But who’s dollar are they talking about. Who’s opinion are they talking about? Are they talking about the seller’s opinion of the dollar? Are they talking about the buyer’s opinion of the dollar? The realtor’s opinion of the dollar? The appraiser’s opinion? The bank’s opinion?

So I stress you must become proficient at determining and making your own investment decisions based off of your own opinion of value. You can lose everything if you don’t. And you’ll be out of investing faster than it took you to get in. And I don’t want that to happen to you but once you do know how to. And I’m going to teach you how to determine your own accurate value. Once your own initial opinion of value is established, you can then decide whether the properties worthy of more of your time if you should present an offer or not. I mean that’s all you’re concerned of during this step.

Do not spend a lot of time investigating every nook and cranny of the property of the market conditions. Not yet. There will be plenty of time for that but I don’t want you to do that yet. And there are two reasons for this. One, you’re going to have sort of pull lot of deals to find the good ones. I mean, if you spend too much time on every deal, the time in between deals will be too long, which means your pay checks will be too far in between.

Not to mention the likelihood of you missing some deals. And two, you’ll have plenty of time later to conduct a more thorough investigation. There will be a much use of your time later as well. I’ll explain why that shortly but for now all you want is an initial opinion of value and to make a decision whether to move forward or not. Within the epic approach, there are three levels of evaluation. And two of them are covered in this depth. Level one evaluation consists of a few questions, one does this fit my criteria? We established criteria in the previous episode and each of every one of you will have a different criteria. Is the subject property in the right area for you? Is it the right type of property for you? Is it in the right price range for you?

If your answer is no to any of those questions, you’re done. Drop it. Your evaluation is complete. I mean move on to the next deal. If your answer is yes to all of those questions or specifically to the one question, does this fit my criteria? The subject property is in my desired area. It’s the right type of property that will move me to the next goal of either cash or cash flow and it’s in the right price range. I mean if all of those apply then we move on to the question.

Question two, who is in control of the property? In my dealing with the property owner, a realtor, a wholesaler, a bank employee, or a guy that just knows a guy? I mean if I’m not talking to the person that has the power to make a decision of whether they sell to me or not, I move on to the next deal. I find more times than not if not always. I mean I’m sure there are some exceptions out there but I find more times than not. The middleman is going to either waste my time and /or cut into my profits. So if you are dealing with the decision maker then you can move on to the next question. If you’re not, move on to the next deal.

The next question number three, does this person or this entity or organization or institution, doesn’t matter who you’re dealing with, do they want to sell or do they need to sell? I mean as investors, you’ll want to work with the sellers that need to sell. That’s where the deals are. If they merely want to sell or they’re only interested in selling. I mean it can be frustrating experience or not a painful less utility. You’ll come out of those types of experiences saying stuff whether thinking stuff like this doesn’t work. All of this stuff doesn’t work. No one’s buying it. No one’s biting. No one’s taking me up on my offers. The reason they’re not is because they’re just interested in selling. You’re looking for the people that need to sell.

Now I conduct the brief seller interview to determine whether they want to sell or if they need to sell? This interview also reveals to me what the seller’s true needs are of which is the root of getting a great deal for yourself and for them as well. I conduct this interview using a seller information questionnaire.

Now I included that questionnaire the exact questionnaire in the Free Real Estate Investing Course – How to Do Deals, No Money Required. I even included a role-play video of what my typical interview looks like. I can conduct this interview over the phone or in person. I prefer to do it in person. However, I do have three key questions I will ask over the phone before I ever conduct that interview. These 3 questions will reveal if there’s any motivation or do they really need to sell? Those questions are, for example, the phone rings. They call me up for one of my yellow letters or one of my signs or one of my Internet ads. Whatever it may be. And they asked me; hey I’ve got a property to sell. And that statement comes in all shapes, forms, sizes, and fashions in different expressions and different intensities but it generally that’s the gist.

They’re calling me because they got a property to sell. So my first question is what’s your situation? Tell me about your situation. And then I just shut up and I listen. Just listen. And you can agree with them and relate with them as they’re explaining the situation but don’t interrupt. Don’t cut them off. Let them fully explain their situation.

The next question I ask them is after I feel that they’ve explained their situation in full to me is what do you want to have happen? What is their desire outcome of which you really want to know? So you ask them the question, what do you want to have happen? And then you just be quiet and let them answer. Be careful not to interrupt. You are listening for very important clues, very important hints.

You’re trying to establish is this going to be worthy of your time or not? You want to hear if there’s motivation in their speaking or if there’s motivation in their wanting to sell? Or excuse me, motivation in their needing to sell. That’s what you’re really listening for. So what do you want to have happen? That’s the second question.

And once you feel they’re complete and they have expressed everything that they want to have happen. The third question is, if we can put something together, how quickly would you like to sell? And be quiet. Wait for the answer. If we can put something together that will be mutually beneficial, we could put something together that you’re happy with. Whatever phrase or however you want, if we can put something together, how quickly would you like to sell?

And you really want to hear something like ASAP or you want to hear something like right now. Or you want to hear something like yesterday. And that answer also it’s going to come in various shapes, forms, or sizes. You’re going to have to use your little bit of intuition. And if at this point, that intuition has led you to believe that this seller needs to sell. You’ll want to schedule a time ASAP to visit the seller at the property to take a look and conduct the rest of the seller interview.

So you know, at this point, there’s a pretty good chance you’ve got a deal so you want to take this part seriously. You don’t want to delay. You want to schedule your time to go over there and meet with the seller so you can complete your seller interview. And then you can discover they have a need, you can satisfy without money.

I mean there’s even a better chance that you’ve got a great deal. I want you to know this right now more times than not you’ll come to this conclusion without ever leaving the office or exerting any extraordinary amount of effort either. This is why I only want you to determine an initial opinion of value. Most investors do all of the physical work and time consuming work without knowing the basic information. The basic information that would have been able to acquire up to this point through our level one evaluation.

The basic information that will determine the possibility if a real deal or not then determine that upfront. Make sure the previous questions are the first questions to be answered when evaluating your deals. Does it fit my criteria? Who’s in control? And do they need to sell or do they want to sell? You’ll save yourself a bunch of time and frustration if you get these questions answered first.

Level one: evaluation is complete. The property fits your criteria. Your speaking to the person that’s in control and they need to sell. Now we can move to level two: evaluation. That’s going over the numbers and determining your initial opinion of value. Before we can do that though let’s go to the basics of evaluation. I’ll do this verbally because it’s basically my only option at the moment. But so you know, there is a video within the Free Real Estate Investing Course: How to Do Deals, No Money Required. That has many visuals to help explain this so if you’re not following along. Make sure you get that course. I mean depending how best you retain information that’s something you want to check out. Or this might be enough. Either way is fine with me. I just want to make sure that you get it.

Now, I consider a property evaluation as one of the most important skills as an investor. As money is essentially made or lost when you buy, I mean you get paid when you sell but you make your money when you buy. And surprisingly, I find a good number of investors, novice and experienced to like. They lack a solid understanding of the basics.

It’s a shame because it can really dig in to their profits. So let’s go to the basics to increase the likelihood of you making money. And actually, much of the risks that people associate with real estate can virtually eliminated with sound evaluation. And it’s funny that more investors don’t take this more seriously because it’s not that difficult and yet it’s so important. Let’s begin with the basic terms of evaluation.

You’ll hear many of these terms used interchangeably but they are distinct. Cost, that’s the amount paid for a property. A cost or the amount paid for property. Price, that’s the amount asked for a property. Value, the amount of property is worth to someone. Then there’s market value or fair market value, that’s the amount that appeals to many buyers and causes a sale within a reasonable time. And for me, a reasonable time is 21 days. I know if I don’t receive 3 to 5 offers within 21 days then I’m likely asking too much for the property. So what characteristics of a property have the biggest influence on the property’s value?

Now you’ve heard I’m sure a million times before, and here’s one more time, location, location, location. A property’s location can account for up to 95% of its value. I mean typically 75% to 85%. This is important to understand because a property’s location is fixed. It is where it is. There’s nothing anyone can do about it. The second most influential characteristic of a property’s value is the size. Now don’t get caught up too much in bedroom, bathroom configurations. Although that does have some influence on value, as an investor you want to pay more attention to square footage. And that’s square footage of the lot or the land. That’s the square footage of the improvements or in other words the buildings or the structure that sits on the land.

Now sometimes people would debate me on this one but as an investor, time is money. And that is the third characteristics that influences value. Time. When I refer to time, I’m speaking of how much time would it take to sell or how much time would it take to rent. Meaning if you have a property value of $100,000 but it took you 9 months to sell to receive your $100,000. What were those 9 months worth to you?

I mean personally, I always take the fast nickel over the slow dime. I mean there’s nothing worse than idol money. What I mean by that I’d rather have that nickel working for me than waiting 9 months to put the dime to work. But that’s my personal preference. You see this is why it’s important to be able to determine your own opinion of value. We all have different wants, different needs, and different goals. Now I frequently receive debate on this one, quality, conditions, and amenities. They’re the last characteristics that influence value. And they have a minimal impact on value. I mean al to less of an impact than most people think. I mean keep in mind; a property with high quality fixtures in immaculate condition with luxurious amenities will not cost a property worth more.

They may cost a property to sell quicker and may cost a property to sell at maximum market value but they don’t increase the properties value. You see, as an investor really makes no difference to me if the property has travertine tiles, imported Italian tile, or basic Linoleum flooring in the kitchen.

As long as it has flooring of which I don’t have to repair, hey it is what it is. It’s a functioning floor. However, poor quality condition and amenities can certainly bring a property’s value down. That’s why I listed as one of the four characteristics that determine value. They don’t increase value but they can decrease value.

Now, this is one of my favourite aspects of the basics. It’s the opinions of value. They’re just that. They are opinions. A buyer’s opinion of value is always at the bottom of the opinions. A seller’s opinion of value is always at the top of the opinions. That’s just fundamental real estate thinking. That’s the way it always been and that’s the way it’s always be.

Now in the middle, you have agents; you have appraiser’s opinions of value. Agents tend to be more optimistic than appraisers but at the end of the day, they too are just opinions even the appraisers. I mean many investors think that an appraisal is some sort of an official certification of value not so. It’s just another opinion.

What most people don’t realize is that the appraiser’s opinion of value tends to favor whoever pays for the appraisal. So don’t be fooled by appraisals. They’re just another opinion and then right in the middle of the mall. We have market value or sometimes referred to as “fair market value.” In some respects of buyer’s behaviour are the most influential characteristics of value. Even more than location and what I mean by that is what is a property really worth. It’s simply worth when someone’s willing to pay for it. Nothing more, nothing less. Never lose sight of this aspect of real estate. I mean at the end of the day, the buyer that actually buys trumps everybody’s opinions. And yes even yours. So how do buyers determine value? Now this is a simple one also. They compare. That too is how it’s always has been and how it’s always be. And that’s where we get the word comps. It’s short for comparables.

Now another aspect to never lose sight of this is that today’s buyers are informed. They’re sophisticated and they’re savvy more than they’ve ever been. In most cases, they know more than the sellers because out they’re shopping. They know the market better than anyone. I mean with the advent of the Internet, I mean today’s market is completely transparent.

It’s kind of like playing poker with all of the cards facing up. There are no secrets. The pertinent information is readily available to whoever wants to sit.

It’s important to know this as an investor. Particularly, if you intend to flip a property because when you’re flipping a property, you are the seller. And knowing what other buyers are aware of in determining value can help you make a significantly better decision in buying a property that you intend to flip.

So when pulling comparables, you’ll look for similar properties based off of characteristics previously mentioned that influence the value. You’re going to look at properties within a relatively close proximity, similar location, where I invest I mostly look at properties within a mile radius.

However, that can vary greatly depending on your area. I mean there are some areas where neighborhoods can change within a couple of blocks. Then there are neighborhoods with giant subdivisions where you can expand the radius to as much as 4 or 5 miles and get relevant comparables. I guess that’s somewhat where the expressions real estate is local come from. I mean you’ve got to know your area or at least be working with someone that does. Someone that you trust preferably.

Now the properties within the relevant locations, you’ll narrow the search further by square footage. Now I chose plus or minus 15% to 20%. Those are my numbers you can use your own numbers. And I further narrow the search by the time of when those properties actually sold.

How long were they on the market? Typically 0 to 90 days isn’t adequate time. Now, there are many schools of thought on how to read comps and how to formulate an opinion of value but my school of thought is to look only the solds. All I care about is what comparable properties sold for. I don’t care whether the property sells for. I don’t care what a property might sell for. I don’t care what a property almost sold for. I simply look at what it did sell for. Now I’ll pick the lowest five properties sold and simply average them together to formulate my initial opinion of value.

It could be higher. It could lower but that just helps me formulate a conservative opinion of value. Now if I can’t find five properties, sometimes for is sufficient depending on my extra strategy or I might broaden my search a bit.

For example, go back a 100 or 120 days instead of 90 days or maybe I’ll up the square footage in my search to 25% plus or minus. Just to try and bring at least another property or tow in the equation so that I have 5 that I can take an average of.

Now if I can’t find 4 or 5 properties that completes this formula. I mean that raises concerns for me. I mean will I be able to flip this property? Is there enough market activity in the area? Or do I have a very unique property that doesn’t sell very often in that area.

I mean those are things I’m going to be thinking about if I can’t find enough comparables. Or I might have to re-evaluate my extra strategy of which will definitely influence my opinion of value.

So I’m going to use different parameters based on my extra strategy but I don’t want to get too deep into that right now. But we will in the very near future promise. I just want to cover the basics of evaluation for the moment.

Now some people look at the actives to help determine value of which I sometimes do. But later on down the road of which we will get to but I don’t waste my time within too much when formulating my initial opinion of value.

If you don’t know, actives are properties that are currently for sale. And you know what, all that really means to me is they have not sold yet. Besides, the seller sets the active prices. We all know where the seller’s opinion of values is set. It sets at the top of the opinions. Right?

But if you want incorporate these in your evaluation. You can take the average of this also. I just don’t think it’s a very useful number. I mean as an average, however, could be a good indicator of where you might want to price a property if you’re going to flip.

Okay. So those are the basics. That’s for today’s show. Next episode is that we will take some of this information and we will complete level two of evaluation of which will lead you to your first opportunity to actually make some money.

So until next time. As a very wise man once said, “a wise man makes his own decisions and ignorant men follows public opinion.” To your success, I am Matt Theriault. Living the dream.

(Music Playing)

(Voice Over): Thank you for spending this time with Matt Theriault and the Epic Real Estate Investing podcast. When you have time, stop by iTunes to leave your comments and let us know what you think of this show. And if you haven’t done so already, get started investing today by visiting FreeRealEstateInvestingCourse.com to access Matt’s free course on how to deals, no money required. Until next time. To your success, to your success, to your success.

[00:22:16]

(End transcript)

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